By Andrei Braghiş
SG Capital Management, one of the "elite" 450 hedge funds we track, has filed its 13F filing for the first quarter of 2013, and it indicates that some significant changes have been made. Ken Grossman and Glen Schneider, the fund's managers, have a new favorite holding in the No.1 spot, while a couple of newcomers occupy the 4th and 5th positions. The original 13F can be seen here.
Why pay attention?
It's important to track the sentiment of the best hedge funds, because on the whole, their best picks have been shown to outperform the market by as much as 18 percentage points a year. Retail investors can capitalize on this phenomenon, but they have to know where to look first.
The number one spot
II-VI (NASDAQ:IIVI), a manufacturer of engineered materials and opto-electronic components, is a new addition to SG Capital Management's 13F portfolio, and incredibly, now holds the No. 1 spot. Grossman and Schneider bought more than 800,000 shares worth by the end of the first quarter. Even more interestingly, there's no overwhelmingly bullish price action here; the stock has been in a downtrend since April 2011, and has fallen 15% in 2013. II-VI shares are trading at a trailing Price to Earnings (P/E) ratio of 18.02 and a forward P/E ratio of 14.93. The stock has a beta of 1.39 and does not pay a dividend.
Three Wall Street analysts recommend it as a Hold, while two others recommend it as a Buy or Strong Buy. The Street also expects II-VI to post weaker year-over-year earnings in 2013, but believe revenues will grow. Consequently, both revenues and earnings are expected to grow in 2014, with a primary growth driver being continued acquisitive growth.
The best of the rest
SG Capital has increased their investment in Cynosure (NASDAQ:CYNO) by 187%, taking the total tally to more than 300,000 shares. Since the start of 2013, this company's stock price has risen to a high of $30.20 and is now trading close to its start-of-the-year price of $24 a share. Cynosure is presently valued at a trailing P/E ratio of 32.42, and sports a forward P/E ratio of 20.19. This is a sign that the market expects the company to perform better in the near future. The stock has a beta of 1.44 and does not pay a dividend.
Cynosure has recently announced its financial results for the first quarter of 2013, beating Wall Street expectations in terms of revenue, but falling short of earnings estimates. Still, the stock is highly regarded by analysts and is tagged as a Strong Buy or Buy by all four of the firms that hold coverage.
Grossman and Schneider have made important additions to their stake in Watsco (NYSE:WSO) as well. Watsco engages in the commerce of air conditioning, heating, and refrigeration equipment in North America. The stock's price has advanced 13% since the start of the year, and is currently trading at a trailing P/E ratio of 30.49 with a forward P/E ratio of 19.77, underlying the market's belief the company will continue to grow. Watsco can be considered a rather safe investment, as it has a beta of 0.86, but pays a dividend of $6.74 a share, representing a whopping yield of 7.80%. Analysts expect the company to grow in terms of both revenues and earnings in 2013 and 2014.
Number four in SG Capital's holdings, and a newcomer at that, Clean Harbors (NYSE:CLH) provides environmental, energy, and industrial services. The stock's price has been fluctuating around its start-of-the-year price of $55. Shares are presently trading at a trailing P/E ratio of 29.03, and have a forward P/E ratio of 16.70.
Clean Harbors' financial results for the first quarter of 2013 missed Wall Street's estimates on both its top and bottom lines, but analysts still consider the stock a good investment. Seven of them recommend it as a Strong Buy, four tag it as a Buy, and just one sees it as a Hold. Aggregately speaking, they've set a price target range of $61-$80; even on the low side, this represents a higher level than Clean Harbors' current share price.
Last but certainly not least, Cypress Semiconductor (NASDAQ:CY) ends SG Capital's top five equity holdings. This stock's price has been oscillating around the $10.50 level since the start of 2013, and has a beta of 1.68. A dividend of $0.44 gives shares a 4.30% yield-second highest in the 30-stock broad line semiconductor industry.
On April 18, Cypress Semiconductor announced its first quarter financial results. Although its revenues and earnings beat the market's expectations, the company's outlook for the second quarter is bleak. Management expects gross margins to fall to 51%, as their mix has been drifting toward lower margin products. Analysts are still bullish on the stock though; seven recommend it as a Hold while eight tag it as a Buy.
Where to next?
SG Capital Management has been adding to their holdings with the highest growth potential of late. The top five holdings of Grossman and Schneider's fund consist of stocks with both high and low betas, most of which pay a dividend. Investors should pay attention to Watsco with the summer around the corner, and Clean Harbors, as its stock price still has significant growth potential.